Economists vs. Astrologers

September 21, 1953

I have tried to explain several times in this column not only why I do not attempt to forecast business conditions but why I do not believe that a science of economic forecasting is even possible. Therefore I was happy to see, in Lloyd’s Bank Review of London in April of this year, the slashing attack by Prof. John Jewkes of Oxford on the fashionable idea that economists can predict the future:

“It cannot be too strongly emphasized that there is nothing in economic science which enables us to foretell events. Those who claim otherwise are dragging their subject down to the level of astrology. . . . There is nothing in history to suggest that the expected will normally happen. . . . Economic prediction as a scientific method is not merely absurd, because impossible, but dangerous, because seductive.”

Yet Professor Jewkes seems to me to commit the rare sin among economists of overstating the case against prediction. He does not distinguish between conditional prediction, which is possible, and categorical prediction, which is presumptuous.

He piles up, for example, a truly impressive list of economic predictions that have gone wrong in the last generation. But he does not distinguish between those that went wrong because the relevant facts were not known, and those that went wrong because of fallacies in economic reasoning that were detectable at the time they were made. Thus he cites the now discredited view “accepted by many economists, and disputed by few” before the war, “that all advanced industrial countries were rapidly passing into a condition of maturity and secular stagnation.” But those who did dispute the view at the time correctly pointed out the fallacies on which it rested.

“It does not need much thought to understand,” writes Jewkes, “why prediction is so hazardous. It can almost be summed up in one word: invention.” But while unforeseen inventions are an important reason why some economic predictions go wrong, they are far from the sole or even the main reason (especially where short-term predictions are concerned). There are two main reasons. One is that the facts and factors which must be taken into account to predict the future are too numerous and complicated for any human mind to grasp. The other is that, in human affairs, predictions themselves change the future they predict. A belief that prices of stocks will rise next year, for example, if prevalent enough in Wall Street, will cause speculators to act in such a way as to bring about a price rise immediately.

Yet Jewkes seems to overstate, as I have said, the case against economic prediction—which means, among other things, the case against business forecasting. And this is all the more remarkable in view of some of his admissions: “Every businessman must make decisions, particularly regarding investment, where hazard and conjecture are inherent. . . . Although no one can be sure about the future, men must by hook or by crook take thought for, and strive to be wise about, the future.”

It is precisely here, I think, that economic reasoning can play a more useful role than Jewkes assumes. While economic forecasting can never be a science, it can sometimes be a help. This necessarily follows from Jewkes’s own admission that economists may properly concern themselves with cause and effect. To understand cause and effect is to that extent to be able to predict. Once we understand, for example, that an increased supply of money causes prices to rise, we can predict that if the government increases the supply of money, then, other things remaining unchanged, prices will rise. An honest business forecaster will, however, make all his forecasts frankly conditional, and merely probable. He is entitled to say: “If X, then probably Y.” This may not seem to offer much to those who are looking for certainty. But it may reduce the number and extent of our bad guesses and increase our batting average of good ones. And that can make a vital difference.